Yale’s endowment return might mirror Harvard’s

The Harvard-Yale rivalry has come to New Haven early this year, and it’s not about football.

It’s about money: Since Harvard University announced last week that its $27.4 billion endowment made solid gains in the last fiscal year, partly erasing the massive losses of the year before, all eyes are on Yale investment chief David Swensen’s office.

Harvard’s 11 percent return has set investment analysts and higher education observers buzzing about what returns might look like for all other massive endowments, but especially Yale’s, which — though historically always second to Harvard’s in size — produced bigger investment returns than its Cambridge rival for the last several years before the 2008 financial crisis.

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Provost Peter Salovey said he is confident the endowment’s return will be between zero and 10 percent, avoiding a loss.

Although the fiscal year ended on June 30, Harvard, Yale and other universities generally do not release endowment results until the fall after a fiscal year end. Accountants spend the months in between evaluating and tallying the investment returns on the parts of the endowment that are more difficult to price than, say, stocks or bonds, Salovey said.

Until the official figure is released in another few weeks, the only thing analysts can say with some certainty is that Yale will have returns comparable to Harvard’s 11 percent, if not exactly that number, said Richard Anderson, the head of the higher education group at Hammond Associates, an endowment consulting firm.

After all, for over a decade, both universities have relied on the so-called Yale model, which calls for investing funds in many diverse assets, especially real estate, private equity, timber, oil, venture capital and other illiquid investments that do not translate easily into cash. And in part because of this strategy, both lost about a quarter of their endowment values in the fiscal year that ended June 30, 2009.

Real estate and timber in particular lost value as a class last fiscal year, Anderson said.

Despite their losses, neither Swensen nor Harvard Management Company President Jane Mendillo have abandoned the model, according to both endowment managers’ most recent reports, though Mendillo has tried to sell off some nontraditional assets.

“Has the ‘endowment model’ run its course?” Mendillo wrote in the six-page report announcing the 11 percent return released Thursday. “Our answer to that question is no.”

But Mendillo cautioned that the model could be improved. To that end, she wrote, HMC spent much of the last year trying to increase liquidity in the endowment by selling off real estate and other investments, so that Harvard could turn to its endowment for quick cash instead of taking on more debt.

Endowment consultants said it is likely that Swensen, too, will eventually bring more liquid assets into Yale’s endowment. Swensen did not respond to a request for comment.

Smaller endowments and ones that are more heavily invested in liquid assets such as stocks and bonds are likely to do slightly better than Harvard, Yale or other large institutional endowments, Anderson said. A theoretical endowment that followed a more traditional strategy of 70 percent investments in stocks and 30 percent in bonds, for instance, would climb 14 percent this year, he said. The Yale Investments Committee increased the percentage of Yale’s endowment invested in real assets from 29 percent in the investment portfolio of two years ago to 37 percent last year, compared to higher education’s average of 10.7 percent. Last year, 11.5 percent of the endowment was invested in stocks, bonds and cash.

“All large endowments will do reasonably well, and they’ll have reasonably similar results,” Anderson said. “But it was better if you just held stocks this past year than doing anything fancy and diversifying your portfolio.”

A positive return would be good news for Yale’s budget, which the University’s budget office planned this year on the assumption that the endowment would not grow at all, except by normal inflation levels of about 5 percent.